Germany is teaming up with California to cooperate on tackling climate change following the U.S. government's decision to withdraw from the 2015 Paris agreement.

Europe's largest economy and the biggest U.S. state in economic terms will back the work of the "Under 2 Coalition," which includes cities, regional governments and states, German Environment Minister Barbara Hendricks said on Saturday.

"We cannot achieve our climate goals without the engagement of local and regional communities. That has become even clearer after the U.S. withdrawal from the Paris climate agreement," Hendricks said after agreeing on the joint approach with California Governor Edmund Brown in San Francisco.

"California and Germany unite the world leaders in the fight against climate change, the existential threat of our time," Brown said in a statement released by the German ministry.

U.S. President Donald Trump's decision to pull the United States from the landmark 2015 Paris agreement drew anger and condemnation from world leaders and industry.

German Chancellor Angela Merkel last week pledged her country's continued commitment to the agreement, calling the U.S. decision "very regrettable."

Hendricks said the German government would ensure that cities, communities and regions played an important role in the U.N. climate change conference in Bonn in November.

July 13, 2013

According to statistics from the US Energy Administration, or EIA, Americans use more than 4,000 billion kilowatt hours in electric energy every year. Only 12% of this energy is created using renewable energy – from geothermal plants, water (hydroelectric plants), organic waste and the sun. Meanwhile, Germany is now creating a record 23.4 gigawatts daily, and all with solar power.

This incredible solar power success is being attributed to more than 1.3 million solar systems spread across the country. More than 8.5 million people either live or work in buildings that use the sun to power their electricity needs entirely or in part.

Germany has held the solar-power creation record for years now, with the Czech Republic and Bulgaria just trailing behind them. Germany was able to beat the new solar-power record as of April of this year due to the installation of more than 33.5 GW of photovoltaics (PV). It proves an industrialized nation can produce massive amounts of clean, non-petroleum based energy through strong government policies and incentives for stimulating the use of solar panels in private homes and businesses.

Even if you haven’t bought into the global warming advisories, the petroleum based money that we normally run the world on – utilizing diesel fuels, gasoline, etc. needs to stop. In 2000, Iraq converted all its oil transactions under the Oil for Food program to euros. When the U.S. invaded Iraq in 2003, it returned oil sales from the euro to the USD. Over $1 trillion dollars was spent on that singular war. Oil money is the reason behind many wars, and countless ecological and environmental travesties.

Oil is toxic to almost every form of life. Crude oil is full of carcinogens, which cause cancer and other diseases. Crude causes birth defects, leukemia (due to the presence of Benzene, a volatile organic compound) and lowered white blood cell count, which is indicative of a compromised immune system.

The combustion of crude oil or petroleum contaminates the air with cancer-causing particles and the high temperatures required to burn crude oil also creates acid rain, or nitrous oxides which also harm human and animal health. Many of our coral reefs have been damaged by the acid rain caused by nitrous oxides, along with sulfur dioxide from the sulfur in the oil, combining with water in the atmosphere to create acid rain.

Numerous oil spills including the Kuwaiti Oil Fires, the Lakeview Gusher in Kern County, California, Gulf War Spill, and Deepwater Horizon(also known as the BP oil disaster) have damaged countless forms of aquatic life and ruined pristine beaches. Three of these spills are considered to be among the worst environmental tragedies of our time.

The question is – why do oil companies continue to have a hold on our energy supply? Sickeningly, oil companies even thrive during economic down turns. Exxon, Chevron and ConocPhillips are among the richest companies on the planet, while they continue to kill human beings, turn an immaculate planet into a sludge pile, and poison ocean life. Further, oil and gas drillers who pollute groundwater, spill toxic chemicals or break other rules have little to fear from the inspectors and agencies regulating the continued surge in American petroleum production. Only the smallest percentage of violations result in any meaningful fines for oil companies.

Perhaps a class action law suit will drain the pockets of oil companies. There is plenty of evidence that alternative energies could have been well-implemented by this time, as Germany so perfectly demonstrates.

December 04, 2012

The European Central Bank (ECB), European Commission, and IMF some time ago pledged €240 billion in rescue loans of which Greece has already received €150 billion. Without these bailout funds that have been keeping the country afloat since May of 2010, Greece would be forced out of the eurozone. Many now see this possibility as having a disastrous domino effect on other financially troubled eurozone nations.

EU Finance Ministers and the IMF have just agreed to: release the next €44 billion ($57 billion) installment of loans to Greece, lower the interest rate, and return €11 billion in profits from ECB purchases of Greek government bonds. The Ministers have also agreed to help Greece buy back its own bonds from private investors. These actions are more than enough to enable the government to pay wages and pensions in December. In return, Greece is bound to more rounds of austerity measures and to submit its economy to tight scrutiny.

The current package aims to cut public debt now at 175% of GDP to 124% by 2020. Greece is seeking a two-year extension of this deadline. However, Germany and the Netherlands are against this as well as further writeoff of Greek debt. It is felt such actions will only weaken the country's resolve to go foreward on painful structural reforms. The IMF believes more fresh capital and even debt writeoff relief will be necessary to get proper control of Greece's debt situation over the next decade.

Both Chancellor Angela Merkel and the Dutch Prime Minister, Mark Rutte, are leary of more debt relief. In fact, Premier Rutte has called for a change in EU laws to allow a country to leave the euro. But Chancellor Merkel has been trying to quell demands from her own coalition for Greece to leave the eurozone. She feels the consequences of this step are far more ominous than giving more financial loan assistance to Greece.

So solutions to the debt crisis are a step-by-step process made more unnerving by heavily-indebted situations in Spain, Italy and Portugal. But I do have confidence the EU Ministers -- at a slow but steady, reflective approach in concert with the IMF -- will do what is structurally needed to stabilize the debt crisis, boost confidence, and positive growth. This may include some easing of austerity measures that are obviously worsening a multi-year contraction of the Greek and Spanish economies. A few months ago, most European northern nations, Germany included, were indicating a willingness to sacrifice Greece. That has changed as Germany now appears determined to deter a broader eurozone crisis that could be precipitated by a Greek exit.

In contrast, the British would likely decide to leave the eurozone if a referendum were held today. More and more British people feel that the excessive austerity to save the euro and debt-laden nations is creating destructive, destabilizing fragmentation, economic retrogression, and toxic internal politics. Many British see a US of Europe with one currency as simply unrealistic ... unlike the United States which is a country of immigrants providing a far more general cohesiveness. Vastly different EU country cultures and traditions make a cohesive, harmonized EU federal state impossible. So goes much UK public opinion of late.

Interesting European times of critical change on so many fronts! But the eurozone has passed another test of its credibility to take decisions on dire financial issues ... without the US option of printing money through "quantitative easing."

November 17, 2012

There is no debate on climate change in Germany. The temperature for the past 10 months has been three degrees above average and we’re again on course for the warmest year on record. There’s no dispute among Germans as to whether this change is man-made, or that we contribute to it and need to stop accelerating the process.Solar panels cover the rooftops of a German farming village. (InsideClimate News/Osha Gray Davidson)

Since 2000, Germany has converted 25 percent of its power grid to renewable energy sources such as solar, wind and biomass. The architects of the clean energy movement Energiewende, which translates to “energy transformation,” estimate that from 80 percent to 100 percent of Germany’s electricity will come from renewable sources by 2050.

Germans are baffled that the United States has not taken the same path. Not only is the U.S. the wealthiest nation in the world, but it’s also credited with jump-starting Germany’s green movement 40 years ago.

“This is a very American idea,” Arne Jungjohann, a director at the Heinrich Boll Stiftung Foundation (HBSF), said at a press conference Tuesday morning in Washington, D.C. “We got this from Jimmy Carter.”

Germany adopted and continued Carter’s push for energy conservation while the U.S. abandoned further efforts. The death of an American Energiewende solidified when President Ronald Reagan ripped down the solar panels atop the White House that Carter had installed.

Since then, Germany has created strong incentives for the public to invest in renewable energy. It pays people to generate electricity from solar panels on their houses. The effort to turn more consumers into producers is accelerated through feed-in tariffs, which are 20-year contracts that ensure a fixed price the government will pay. Germany lowers the price every year, so there’s good reason to sign one as soon as possible, before compensation falls further.

The money the government uses to pay producers comes from a monthly surcharge on utility bills that everyone pays, similar to a rebate. Ratepayers pay an additional cost for the renewable energy fund and then get that money back from the government, at a profit, if they are producing their own energy.

In the end, ratepayers control the program, not the government. This adds consistency, Davidson says. If the government itself paid, it would be easy for a new finance minister to cut the program upon taking office. Funding is not at the whim of politicians as it is in the U.S.

“Everyone has skin in the game,” says writer Osha Gray Davidson. “The movement is decentralized and democratized, and that’s why it works. Anybody in Germany can be a utility.”

The press conference the foundation organized with InsideClimate News comes two weeks after one of the biggest storms in U.S. history and sits in the shadow of the Keystone XL Pipeline, which would unlock the world’s second-largest oil reserve in Canada. The event also comes one day after a report that says that the U.S. is on track to become the leading oil and gas producer by 2020, which suggests that the U.S. has the capability to match Germany’s green movement, but is instead using its resources to deepen its dependency on fossil fuels.

Many community organizers have given up on government and are moving to spark a green movement in the U.S. through energy cooperatives.

Anya Schoolman is a D.C. organizer who has started many co-ops in the district although she began with no experience. She says that converting to renewable energy one person at a time would not work in the U.S. because of legal complexities and tax laws that discourage people from investing in clean energy.

Grid managers in the U.S., she explains, often require households to turn off wind turbines at night, a practice called “curtailment.”

“It’s a favor to the utility companies,” she says, which don’t hold as much power in Germany as they do in the United States.

Individuals and cooperatives own 65 percent of Germany’s renewable energy capacity. In the U.S. they own 2 percent. The rest is privately controlled.

The largest difference, panelists said, between Germany and the U.S. is how reactive the government is to its citizens. Democracy in Germany has meant keeping and strengthening regulatory agencies while forming policies that put public ownership ahead of private ownership.

“In the end,” says Davidson, who spent a month in Germany studying the Energiewende, “it isn’t about making money. It’s about quality of life.”

June 19, 2012

Ever since Greece hit the skids, we’ve heard a lot about what’s wrong with everything Greek. Some of the accusations are true, some are false — but all of them are beside the point. Yes, there are big failings in Greece’s economy, its politics and no doubt its society. But those failings aren’t what caused the crisis that is tearing Greece apart, and threatens to spread across Europe.

No, the origins of this disaster lie farther north, in Brussels, Frankfurt and Berlin, where officials created a deeply — perhaps fatally — flawed monetary system, then compounded the problems of that system by substituting moralizing for analysis. And the solution to the crisis, if there is one, will have to come from the same places.

So, about those Greek failings: Greece does indeed have a lot of corruption and a lot of tax evasion, and the Greek government has had a habit of living beyond its means. Beyond that, Greek labor productivity is low by European standards — about 25 percent below the European Union average. It’s worth noting, however, that labor productivity in, say, Mississippi is similarly low by American standards — and by about the same margin.

On the other hand, many things you hear about Greece just aren’t true. The Greeks aren’t lazy — on the contrary, they work longer hours than almost anyone else in Europe, and much longer hours than the Germans in particular. Nor does Greece have a runaway welfare state, as conservatives like to claim; social expenditure as a percentage of G.D.P., the standard measure of the size of the welfare state, is substantially lower in Greece than in, say, Sweden or Germany, countries that have so far weathered the European crisis pretty well.

So how did Greece get into so much trouble? Blame the euro.

Fifteen years ago Greece was no paradise, but it wasn’t in crisis either. Unemployment was high but not catastrophic, and the nation more or less paid its way on world markets, earning enough from exports, tourism, shipping and other sources to more or less pay for its imports.

Then Greece joined the euro, and a terrible thing happened: people started believing that it was a safe place to invest. Foreign money poured into Greece, some but not all of it financing government deficits; the economy boomed; inflation rose; and Greece became increasingly uncompetitive. To be sure, the Greeks squandered much if not most of the money that came flooding in, but then so did everyone else who got caught up in the euro bubble.

And then the bubble burst, at which point the fundamental flaws in the whole euro system became all too apparent.

Ask yourself, why does the dollar area — also known as the United States of America — more or less work, without the kind of severe regional crises now afflicting Europe? The answer is that we have a strong central government, and the activities of this government in effect provide automatic bailouts to states that get in trouble.

Consider, for example, what would be happening to Florida right now, in the aftermath of its huge housing bubble, if the state had to come up with the money for Social Security and Medicare out of its own suddenly reduced revenues. Luckily for Florida, Washington rather than Tallahassee is picking up the tab, which means that Florida is in effect receiving a bailout on a scale no European nation could dream of.

Or consider an older example, the savings and loan crisis of the 1980s, which was largely a Texas affair. Taxpayers ended up paying a huge sum to clean up the mess — but the vast majority of those taxpayers were in states other than Texas. Again, the state received an automatic bailout on a scale inconceivable in modern Europe.

So Greece, although not without sin, is mainly in trouble thanks to the arrogance of European officials, mostly from richer countries, who convinced themselves that they could make a single currency work without a single government. And these same officials have made the situation even worse by insisting, in the teeth of the evidence, that all the currency’s troubles were caused by irresponsible behavior on the part of those Southern Europeans, and that everything would work out if only people were willing to suffer some more.

Which brings us to Sunday’s Greek election, which ended up settling nothing. The governing coalition may have managed to stay in power, although even that’s not clear (the junior partner in the coalition is threatening to defect). But the Greeks can’t solve this crisis anyway.

The only way the euro might — might — be saved is if the Germans and the European Central Bank realize that they’re the ones who need to change their behavior, spending more and, yes, accepting higher inflation. If not — well, Greece will basically go down in history as the victim of other people’s hubris.

May 13, 2012

Both countries held elections Sunday that were in effect referendums on the current European economic strategy, and in both countries voters turned two thumbs down. It’s far from clear how soon the votes will lead to changes in actual policy, but time is clearly running out for the strategy of recovery through austerity — and that’s a good thing.

Needless to say, that’s not what you heard from the usual suspects in the run-up to the elections. It was actually kind of funny to see the apostles of orthodoxy trying to portray the cautious, mild-mannered François Hollande as a figure of menace. He is “rather dangerous,” declared The Economist, which observed that he “genuinely believes in the need to create a fairer society.” Quelle horreur!

What is true is that Mr. Hollande’s victory means the end of “Merkozy,” the Franco-German axis that has enforced the austerity regime of the past two years. This would be a “dangerous” development if that strategy were working, or even had a reasonable chance of working. But it isn’t and doesn’t; it’s time to move on. Europe’s voters, it turns out, are wiser than the Continent’s best and brightest.

What’s wrong with the prescription of spending cuts as the remedy for Europe’s ills? One answer is that the confidence fairy doesn’t exist — that is, claims that slashing government spending would somehow encourage consumers and businesses to spend more have been overwhelmingly refuted by the experience of the past two years. So spending cuts in a depressed economy just make the depression deeper.

Moreover, there seems to be little if any gain in return for the pain. Consider the case of Ireland, which has been a good soldier in this crisis, imposing ever-harsher austerity in an attempt to win back the favor of the bond markets. According to the prevailing orthodoxy, this should work. In fact, the will to believe is so strong that members of Europe’s policy elite keep proclaiming that Irish austerity has indeed worked, that the Irish economy has begun to recover.

But it hasn’t. And although you’d never know it from much of the press coverage, Irish borrowing costs remain much higher than those of Spain or Italy, let alone Germany. So what are the alternatives?

One answer — an answer that makes more sense than almost anyone in Europe is willing to admit — would be to break up the euro, Europe’s common currency. Europe wouldn’t be in this fix if Greece still had its drachma, Spain its peseta, Ireland its punt, and so on, because Greece and Spain would have what they now lack: a quick way to restore cost-competitiveness and boost exports, namely devaluation.

As a counterpoint to Ireland’s sad story, consider the case of Iceland, which was ground zero for the financial crisis but was able to respond by devaluing its currency, the krona (and also had the courage to let its banks fail and default on their debts). Sure enough, Iceland is experiencing the recovery Ireland was supposed to have, but hasn’t.

Yet breaking up the euro would be highly disruptive, and would also represent a huge defeat for the “European project,” the long-run effort to promote peace and democracy through closer integration. Is there another way? Yes, there is — and the Germans have shown how that way can work. Unfortunately, they don’t understand the lessons of their own experience.

Talk to German opinion leaders about the euro crisis, and they like to point out that their own economy was in the doldrums in the early years of the last decade but managed to recover. What they don’t like to acknowledge is that this recovery was driven by the emergence of a huge German trade surplus vis-à-vis other European countries — in particular, vis-à-vis the nations now in crisis — which were booming, and experiencing above-normal inflation, thanks to low interest rates. Europe’s crisis countries might be able to emulate Germany’s success if they faced a comparably favorable environment — that is, if this time it was the rest of Europe, especially Germany, that was experiencing a bit of an inflationary boom.

So Germany’s experience isn’t, as the Germans imagine, an argument for unilateral austerity in Southern Europe; it’s an argument for much more expansionary policies elsewhere, and in particular for the European Central Bank to drop its obsession with inflation and focus on growth.

The Germans, needless to say, don’t like this conclusion, nor does the leadership of the central bank. They will cling to their fantasies of prosperity through pain, and will insist that continuing with their failed strategy is the only responsible thing to do. But it seems that they will no longer have unquestioning support from the Élysée Palace. And that, believe it or not, means that both the euro and the European project now have a better chance of surviving than they did a few days ago.

April 24, 2012

BERLIN — With political allies weakened or ousted, Chancellor Angela Merkel’s seat at the head of the European table has become much less comfortable, as a reckoning with Germany’s insistence on lock-step austerity appears to have begun.

“The formula is not working, and everyone is now talking about whether austerity is the only solution,” said Jordi Vaquer i Fanés, a political scientist and director of the Barcelona Center for International Affairs in Spain. “Does this mean that Merkel has lost completely? No. But it does mean that the very nature of the debate about the euro-zone crisis is changing.”

A German-inspired austerity regimen agreed to just last month as the long-term solution to Europe’s sovereign debt crisis has come under increasing strain from the growing pressures of slowing economies, gyrating financial markets and a series of electoral setbacks.

Spain officially slipped back into recession for the second time in three years on Monday, after following the German remedy of deep retrenchment in public outlays, joining Italy, Belgium, the Netherlands and the Czech Republic. In the Netherlands, Prime Minister Mark Rutte handed his resignation to Queen Beatrix on Monday after his government failed to pass new austerity measures over the weekend.

The political upheaval drove stock markets on the Continent sharply lower, with Germany’s DAX index finishing the day down 3.4 percent. The sell-off in Europe dragged American indexes down around 1 percent. A survey of European purchasing managers showed an unexpected plunge in confidence this month.

The Netherlands, a staunch supporter of the German position, became the latest European country forced into early elections by the European crisis, just one day after the first round of presidential voting in France raised the possibility that the incumbent, Nicolas Sarkozy, would be unseated by his Socialist challenger, François Hollande, in a runoff election.

From trading floors to polling stations to the streets of cities across Europe, the message appears increasingly to be that countries cannot cut their way to fiscal health. They need growth, too. In recent months, powerful voices have joined the chorus, including those of the managing director of the International Monetary Fund, Christine Lagarde, and Italy’s prime minister, Mario Monti. Treasury Secretary Timothy F. Geithner has called repeatedly for Europe to defer budget cutting in favor of some form of stimulus spending.

Pressured by the presidential campaign, even Mr. Sarkozy, once Ms. Merkel’s most prominent ally, has begun to talk of the need for growth.

Despite the rising criticism, Berlin did not seem ready to concede defeat for its austerity plan.

“We certainly still have many difficult reforms, measures and times ahead of us,” said Martin Kotthaus, spokesman for the Finance Ministry. “But the path appears to be correct. At least that is what the development of the last weeks and months proves, and also — as far as I can tell — the surveys of the populations of the European Union.”

It was only in March that leaders from 25 of the 27 European Union countries gathered to sign the fiscal compact championed by Ms. Merkel. Her plan, combined with $1.3 trillion in cheap loans injected into the banking system by the European Central Bank in December and March, raised hopes that the worst of the crisis had passed.

But those hopes have been dashed as growth has faltered and interest rates on the debt of struggling countries like Spain and Italy have shot up to dangerous levels again.

However, while there is a growing consensus on the need for new growth policies, it is far from obvious what those policies should be, particularly for the heavily indebted countries already having trouble selling government debt.

“You have this dilemma because you have to borrow more money to finance growth measures, but that is also likely to stir up the financial markets,” said Tanja Börzel, a professor of European Union politics at the Free University in Berlin. “Then the money you need will be more expensive to borrow.”

The European Central Bank cannot be counted on to deliver major monetary stimulus in the manner of the United States Federal Reserve because the bank is required by treaty to combat inflation above all else. One option is to allow debtor countries more time to bring their deficits under control, but that is seen more as damage control than as a way to foster growth.

Another possibility, which Germany will be under renewed pressure to accept, is some form of common European debt, generally referred to as Eurobonds, which any member of the currency zone could tap. It is a step that Ms. Merkel’s conservative bloc has opposed forcefully, but with more than 17 million people in the euro zone out of work and the unemployment rate at 10.8 percent, the need for urgent steps is growing.

Marie Diron, an economic adviser to the consulting firm Ernst & Young, said Germany could slow down its own drive to balance its budget and do more to encourage domestic consumption. Other European states would benefit if Germany bought more of their goods.

“Austerity has to fit into a wider policy context,” Ms. Diron said.

Taking advantage of growing voter outrage, fringe parties like the Greek ultranationalist group Golden Dawn and France’s far-right National Front, which won nearly one in five votes Sunday, are gaining strength, evoking comparisons to the Weimar era, which ushered the Nazi Party into power. That has only added urgency to the push for programs that would create jobs.

“You see an incredible public uproar against the strict austerity measures,” Ms. Börzel said. “It’s mostly the populist parties that now become ever more critical of the austerity policies.”

Even in Germany, where unemployment is low and the crisis seems a faraway phenomenon, the political landscape has grown unpredictable. The computer hackers of the Pirate Party, which supports Internet freedom, have emerged from relative obscurity to challenge the Green Party as the third most powerful faction in opinion polls.

Ms. Merkel’s coalition partners, the pro-business Free Democrats, have been the most prominent victims of the political instability. In trying to stave off its total collapse, the party has become a less and less reliable partner, especially when European rescue packages are up for votes in the German Parliament.

“In a nutshell, you need growth and employment or else debt reduction doesn’t work. We’re seeing that right now in Spain,” Sigmar Gabriel, the head of Germany’s opposition Social Democrats, said on German public radio, adding that Ms. Merkel’s policies had failed in southern Europe. “The success of Hollande was in sending a signal beyond France that the politics of Merkel and Sarkozy are not without alternatives.”

Over the years of the euro crisis, Ms. Merkel has moved on the problems at a deliberate pace, a tactic of brinkmanship meant to achieve debt reduction across the euro zone while limiting German exposure to other countries’ liabilities and, therefore, minimizing political damage at home. So far it has largely worked in Germany, and her support in Europe is broader than it appears, with smaller countries like the Baltics, Finland and Austria — and even the larger and increasing supportive Poland — content to stand quietly behind her.

Ms. Merkel has proved herself a masterful tactician time and again. She was adept at working with the Social Democrats as her partner in the previous German government, and Mr. Hollande might be even more amenable than Mr. Sarkozy to ceding French sovereignty in economic policy in exchange for help on growth, Mr. Vaquer from the Barcelona Center for International Affairs said.

“She will have to backtrack on austerity anyway,” Mr. Vaquer said. “Germany can now extract a much more unified Europe in terms of economic governance than it ever could have before.”

October 22, 2011

Norddeutsche Landesbank, a public corporation by the federal states of Lower Saxony and Saxony-Anhalt. (Photo: dierk schaefer)

Publicly owned banks were instrumental in funding Germany's "economic miracle" after the devastation of World War II. Although the German public banks have been targeted in the last decade for takedown by their private competitors, the model remains a viable alternative to the private profiteering being protested on Wall Street today.

One of the demands voiced by protesters in the Occupy Wall Street movement is for a "public option" in banking. What that means was explained by Dr. Michael Hudson, professor of economics at the University of Missouri in Kansas City, in an interview by Paul Jay of the Real News Network on October 6:

[T]he demand isn't simply to make a public bank, but is to treat the banks generally as a public utility, just as you treat electric companies as a public utility.... Just as there was pressure for a public option in health care, there should be a public option in banking. There should be a government bank that offers credit card rates without punitive 30% interest rates, without penalties, without raising the rate if you don't pay your electric bill. This is how America got strong in the 19th and early 20th century, by essentially having public infrastructure, just like you'd have roads and bridges.... The idea of public infrastructure was to lower the cost of living and to lower the cost of doing business.

We don't hear much about a public banking option in the United States, but a number of countries already have a resilient public banking sector. A May 2010 article in The Economist noted that the strong and stable publicly owned banks of India, China and Brazil helped those countries weather the banking crisis afflicting most of the world in the last few years.In the US, North Dakota is the only state to own its own bank. It is also the only state that has sported a budget surplus every year since the 2008 credit crisis. It has the lowest unemployment rate in the country and the lowest default rate on loans. It also has oil, but so do other states that are not doing so well. Still, the media tend to attribute North Dakota's success to its oil fields.However, there are other Western public banking models that are successful without oil booms. Europe has a strong public banking sector; and leading it is Germany, with 11 regional public banks and thousands of municipally owned savings banks. Germany emerged from World War II with a collapsed economy that had degenerated into barter. Today, it is the largest and most robust economy in the eurozone. Manufacturing in Germany contributes 25 percent of gross domestic product, more than twice that in the UK. Despite the recession, Germany's unemployment rate, at 6.8 percent, is the lowest in 20 years. Underlying the economy's strength is its Mittelstand - small to medium sized enterprises - supported by a strong regional banking system that is willing to lend to fund research and development.In 1999, public banks dominated German domestic lending, with private banks accounting for less than 20 percent of the market, compared to more than 40 percent in France, Spain, the Nordic countries and Benelux. Since then, Germany's public banks have come under fire; but local observers say that is due to rivalry from private competitors rather than a sign of real weakness in the sector.As precedent for a public option in banking, then, the German model deserves a closer look.From the Ashes of Defeat to World Leader in ManufacturingGermany emerged phoenix-like from its disastrous defeat in two world wars to become Europe's economic powerhouse in the second half of the 20th century. In 1947, German industrial output was only one-third its 1938 level, and a large percentage of its working-age men were dead. Less than ten years after the war, people were already talking about the German economic miracle; and 20 years later, its economy was the envy of most of the world. By 2003, a country half the size of Texas had become the world's leading exporter, producing high quality automobiles, machinery, electrical equipment and chemicals. Only in 2009 was Germany surpassed in exports by China, which has a population of over 1.3 billion to Germany's 82 million. In 2010, while much of the world was still reeling from the 2008 financial collapse, Germany reported 3.6 percent economic growth.The country's economic miracle has been attributed to a variety of factors, including debt forgiveness by the Allies, currency reform, the elimination of price controls and the reduction of tax rates. But while those factors freed the economy from its shackles, they don't explain its phenomenal rise from a war-torn battlefield to world leader in manufacturing and trade.One overlooked key to the country's economic dynamism is its strong public banking system, which focuses on serving the public interest rather than on maximizing private profits. After the Second World War, it was the publicly owned Landesbanks that helped family-run provincial companies get a foothold in world markets. As Peter Dorman describes the Landesbanks in a July 2011 blog:

They are publicly owned entities that rest on top of a pyramid of thousands of municipally owned savings banks. If you add in the specialized publicly owned real estate lenders, about half the total assets of the German banking system are in the public sector. (Another substantial chunk is in cooperative savings banks.) They are key tools of German industrial policy, specializing in loans to the Mittelstand, the small-to-medium size businesses that are at the core of that country's export engine. Because of the landesbanken, small firms in Germany have as much access to capital as large firms; there are no economies of scale in finance. This also means that workers in the small business sector earn the same wages as those in big corporations, have the same skills and training, and are just as productive. [Emphasis added.]

The Landesbanks function as "universal banks" operating in all sectors of the financial services market. All are controlled by state governments and operate as central administrators for the municipally owned savings banks, or Sparkassen, in their area.The Sparkassen were instituted in Germany in the late 18th century as nonprofit organizations to aid the poor. The intent was to help people with low incomes save small sums of money, and to support business start-ups. The first savings bank was set up by academics and philanthropically minded merchants in Hamburg in 1778, and the first savings bank with a local government guarantor was founded in Goettingen in 1801. The municipal savings banks were so effective and popular that they spread rapidly, increasing from 630 in 1850 to 2,834 in 1903. Today the savings banks operate a network of over 15,600 branches and offices and employ over 250,000 people, and they have a strong record of investing wisely in local businesses.Targeted for PrivatizationThe reputation and standing of the German public banks were challenged, however, when they emerged as competitors in international markets. Peter Dorman writes:

[T]he EU doesn't like the landesbanken. They denounce the explicit and implicit public subsidies that state ownership entails, saying they violate the rules of competition policy. For over a decade they have fought to have the system privatized. In the end, the dispute is simply ideological: if you think that public ownership should only be an exception, narrowly crafted to address specific market failures, you want to see the landesbanken put on the auction block. If you think an economy should be organized to meet socially defined needs, you would want a large part of capital allocation to be responsive to public input, and you'd fight to keep the landesbanken the way they are. (There is a movement afoot in the US to promote public banking.)

The vicissitudes of German banking in the last decade were traced in a July 2011 article by Ralph Niemeyer, editor in chief of EUchronicle, titled "Commission's Dirty Task: WESTLB Devoured by Private Banks." He notes that after 1999, the major private banks left the path of sustainable traditional banking to gamble in collateralized debt obligations, credit default swaps and derivatives. Private German banks accumulated an estimated €600 billion in toxic assets through their investment banking branches, for which German taxpayers wound up providing guarantees. Deutsche Bank AG was feeding its record profits almost exclusively through its investment banking division, which made a fortune trading credit default swaps on Greek state obligations. When this investment turned sour, the German government had to bail out the financial institution into which Deutsche Bank AG dumped these toxic assets.While the large private banks were betting on the casinos of the financial markets, lending to businesses and the "real" economy was left to the public Sparkassen, which were more efficient in serving average citizens and local business because they were not stock companies that had to satisfy shareholders' hunger for ever-larger dividends. Today, the market share of private banks in Germany is only 28.4 percent, and Deutsche Bank AG dominates the segment. But with its 7 percent market share, it is still well behind the public banks owned by municipalities and communities.Neimeyer says the private banks wanted to break up the market dominance of the public banks to get a bigger piece of the pie themselves, and they used the European Commission to do it. The Commission had been lobbied since the early 1990s by German private banks and by Deutsche Bank AG in particular to attack the German government over the country's "inflexible" public banking sector.The International Monetary Fund, too, had long demanded that any competing public monopolies in the German banking market be broken up, citing their "inefficiencies." When the German public Sparkassen and Landesbanken were reluctant to turn to investment banking with its skyrocketing profits, they were branded as bureaucratic and "unsexy." When they were pressured to increase their returns for their government owners, the German Landesbanken did get sucked to some extent into derivatives and collateralized debt obligations (fraudulently rated triple A). But while they "lost billions in the Goldman Sachs, Deutsche Bank and Lehman Brothers Ponzi scheme," Niemeyer says the extent to which they became involved in highly speculative transactions was "laughable in comparison with the damage done by private banks, for whom taxpayers are now providing guarantees."It was the public banks and Sparkassen that supplied the real economy with liquidity, and that stepped in for the private banks when they withdrew to bet in the financial casino; but it was on the failings of the Landesbanken and Sparkassen that the media focused their attention. The real motive, says Niemeyer, was that the large private banks wanted the public banks' market share themselves:

In order to win back this important market share, it has become a prerogative to destroy public banking in Germany completely. This unpopular move could never come from the German government itself, so that's why the [European] Commission is being employed for this dirty job.

The Price of SuccessThe German public banks were brought down by knocking their public legs out from under them. Previously, they had enjoyed state guarantees that allowed them to acquire and lend funds at substantially better rates than private banks were able to do. But in 2001, the European Commission ruled to strip the Landesbanks of their explicit state credit guarantees, forcing them to compete on the same terms as private banks. And today, the European Banking Authority is refusing to count the banks' implicit state guarantees in their "stress tests" for banking solvency.The upshot is that the German public banks are being stripped of what has made them stable, secure and able to lend at low interest rates: they have had the full faith and credit of the government and the public behind them. By eliminating the profit motive, focusing on the public interest and relying on government guarantees, the German public banks were able to turn bank credit into the sort of public utility described by Professor Hudson.The example of Germany shows that even success is no guarantee in the face of a relentless onslaught of propaganda by large privately owned banks interested only in making money for their CEOs, wealthiest clients and shareholders. But peering behind the propaganda, the public banking model that helped underwrite Germany's economic success might be the fast track to a US banking system that serves Main Street rather than Wall Street.

June 07, 2011

Germany has been a frequent cudgel in recent fights over the American economy. When Germany has grown faster than the United States, stimulus skeptics like to point across the Atlantic Ocean and say that austerity works. When it has grown more slowly, people who think the American stimulus made a big difference — including me — return the favor.

But the full story is more interesting than any caricature. In the last decade, Germany has succeeded in some important ways that the United States has not. The lessons aren’t simply liberal or conservative. They are both.

With our economy weakening once again — and with Chancellor Angela Merkel of Germany visiting the White House this week — now seems to be a good time to take a closer look.

The brief story is that, despite its reputation for austerity, Germany has been far more willing than the United States to use the power of government to help its economy. Yet it has also been more ruthless about cutting wasteful parts of government.

The results are intriguing. After performing worse than the American economy for years, the Germany economy has grown faster since the middle of last decade. (It did better than our economy before the crisis and has endured the crisis about equally). Just as important, most Germans have fared much better than most Americans, because the bounty of their growth has not been concentrated among a small slice of the affluent.

Inflation-adjusted average hourly pay has risen almost 30 percent since 1985 in Germany, the kind of gains American workers have not enjoyed since the ’50s and ’60s. In this country, hourly pay has risen a scant 6 percent since 1985.

Germany also managed to avoid a housing bubble, unlike the United States, Britain, Ireland, Spain and other countries. German children have stronger math and science skills than ours. Its medium-term budget deficit is smaller. Its unemployment rate is like a mirror image of ours: 6.1 percent, well below where it was when the financial crisis began in 2007. Our rate has risen to 9.1 percent.

I’m not saying that the United States should want to become Germany. Americans remain considerably richer. We have the innovative companies — Wal-Mart, Google, Apple, Facebook, Twitter — that make other countries swoon. We remain the world’s immigration Mecca.

Yet for all the strengths of the United States, almost nobody claims that the economy is in especially good shape. It so happens that our current out-of-town guests could teach us a few things.

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The first lesson is that it’s really possible to make government more efficient. Like much of Western Europe, Germany long had a unemployment benefits system that discouraged work. But almost a decade ago, it began to make some changes.

It cut many benefits, in both duration and level, and it reduced the incentives to retire early. It also began trying to move the long-term unemployed into the labor force.

Specifically, the government took a fresh look at people who had not worked in years to determine who could and couldn’t work. The able and healthy were matched with potential employers. If they took a low-paying job, which was often the case, they would still receive a small portion of their benefits for a time. If they refused to work, their benefits were reduced anyway.

“The incentives to take up work were strengthened,” says Felix Hüfner of the Organization for Economic Co-operation and Development, “and also the sanctions were strengthened.” Sure enough, the reforms have nudged more people back into the labor force — and work tends to beget more work, as people develop skills and have more money to spend.

In the United States, short-term jobless benefits are not generous enough to be a major problem. But the Social Security disability program, which is one reason nearly 20 percent of working-age American men are not working, would benefit from some German-like reforms. So would those public sector pensions that encourage people to retire at 55 or 60.

Beyond the job market, Germany has also made a big effort to improve its education system. Eric Hanushek, a Stanford University economist, notes that Germany’s performance on the main international math, reading and science tests have become such a matter of national concern that the name of the tests — Pisa — is now a household word. “In the U.S.,” he says, “Pisa is still a bell tower in Italy.”

The math scores of German students have risen significantly since 2000, extending their existing lead over American students. Germany’s national average is now higher than the average in Massachusetts, this country’s top-performing state. And there is obviously a connection between strong technical skills and a strong manufacturing sector.

But the German story is not merely about making government more efficient. It’s also about understanding the unique role that government must play in a market economy.

That role starts with serious regulation. American regulators stood idle as the housing bubble inflated. German banks often required a down payment of 40 percent.

Unlike what happened here, German laws and regulators have also prevented the decimation of their labor unions. The clout of German unions, at individual companies and in the political system, is one reason the middle class there has fared decently in recent decades. In fact, middle-class pay has risen at roughly the same rate as top incomes.

The top 1 percent of German households earns about 11 percent of all income, virtually unchanged relative to 1970, according to recent estimates. In the United States, the top 1 percent makes more than 20 percent of all income, up from 9 percent in 1970. That’s right: only 40 years ago, Germany was more unequal than this country.

Finally, there are taxes. Germany does not have a smaller budget deficit because it spends less. Germany, you’ll recall, is the original welfare state. It has a smaller deficit because it is more willing to match the benefits it wants with the needed taxes. The current deficit-reduction plan includes about 60 percent spending cuts and 40 percent tax increases, Mr. Hüfner says. It’s like trying to lose weight by both eating less and exercising more.

As I suggested before, the American economy’s strengths may still be greater than the German economy’s. But Germany sure does seem more serious about dealing with its weaknesses.

And us? Well, lobbyists for the mortgage bankers and the N.A.A.C.P. have recently started pushing for less stringent standards for down payments. Wall Street is trying to water down other financial regulation, too.

Some Democrats say Social Security and Medicare must remain unchanged. Most Republicans refuse to consider returning tax rates even to their 1990s levels. Republican leaders also want to make deep cuts in the sort of antipoverty programs that have helped Germany withstand the recession even in the absence of big new stimulus legislation.

There is no getting around the fact that financial crises wreak terrible damage. It’s too late for us to prevent that damage, and it will take a long time to recover fully. It is not too late to learn from our mistakes.

March 27, 2011

Germany's economy is doing just fine while the US economy languishes. There are many reasons for this, but one that predominates is the Value Added Tax (VAT). At each stage in the production process, when a product or service changes hands, it is taxed at 19%. So if you're manufacturing a car, for example, when you buy a component like a transmission from another manufacturer, that manufacturer has to pay the VAT before that product can be sold to you. Some products and services like food and doctors pay a lower VAT.

The VAT must be paid on all imports in one fell swoop as they enter the country whereas the VAT was paid in stages by different business entities at each stage along the supply chain within the country. This tends to discourage imports, and make it more profitable to manufacture and sell (and thus provide jobs) within the country of Germany itself. Contrast this with America in which there is no tax on imports (thanks to free trade) so it is cheaper to manufacture abroad and import products into the US thus creating jobs abroad. The VAT acts as a tariff on imports and also provides a loopholeproof source of revenues for the government. In the US many major corporations like GE and Exxon Mobil, for example, pay no income tax even though they make tens of billions of dollars in profits. In fact many of them actually get tax refunds or subsidies! This process defunds the government, frays the safety net for the middle class and the poor and results in the budget being balanced, to the extent that it is, on the backs of the poor and middle class.

For German exports, the VAT is refunded thus encouraging exports at the expense of imports. No wonder Germany has a healthy export economy. This acts like a tariff in reverse. So imports are subjected to a 19% VAT at the border and exports are given a 19% refund at the border. American exports are given no such incentive. In short the US is letting foreign countries eat their lunch and running up their trade deficit in the process because of an antiquated approach to taxation which favors American multinationals while shortchanging American taxpayers.

Unknown to most Americans, the United States is losing the ability to compete in global trade because of the little known foreign Value-Added Tax (VAT).

Foreign governments use this tax against United States producers as a means to prevent the importation and consumption of U.S. goods, while providing incentives for their countries to export their goods to the U.S. The foreign VAT was a subsidy created after World War II to speed up beneficial other countries' recovery. However, it is still used today by 149 countries to exploit this advantageous position against American trade. We have not used it domestically to off set theirs as a benefit to ourselves.

The foreign VAT gives the companies of other nations and their exports the upper-hand by providing incentives in the form of rebates equal to the indirect tax on the exported product. For example, the VAT rate is 19 percent in Germany; therefore the Germans receive a 19 percent rebate from their government on each product exported to the U.S. This acts as a subsidy for a product while encouraging the exportation of products to the U.S. However, the VAT imposes a punishment on U.S. exports by placing a VAT equivalent to the Value Added Tax rate of the importing country. This means all U.S. exports that enter into Germany are taxed 19 percent on top of another 19 percent for the transportation fees of the goods into the country. The VAT destroys American industries’ ability to promote exports, while encouraging foreigners to sell their products to Americans – it must be amended or eliminated.

In 2001, European countries had a VAT rate of 19.2 percent. By 2005, 94 percent of U.S. exports received a VAT. In the same year, foreign governments received rebates of $239 billion from the tax while collecting $131 billion from U.S. producers of goods and services.

It is not surprising that the U.S. has become a nation promoting imports over exports under these unfair and harsh tax conditions. It can be seen why some companies choose to move overseas to produce their product abroad to avoid this monstrous tax and gain the advantage of it in some cases. Because of this detrimental tax, American firms cannot compete worldwide.

Numerous attempts have been made by Congress to offset the tax – in 1974 the Nixon administration was urged to negotiate the tax during the Tokyo Round of global trade talks – only to be ignored by the other countries.

In 1972 and 1984, Congress changed the tax system to exempt between 15 and 30 percent of an exporter’s income from U.S. taxes to offset the disadvantage of the VAT. The European Union (EU) complained to the World Trade Organization (WTO) in 1998, saying the U.S. tax exemption, acting as a tax subsidy, was a direct violation of the WTO agreement. In 1999 the WTO ruled in favor of the EU, giving the U.S. one year to change its tax exemption law or face penalties from the WTO.

Again in 2000, Americans enacted new tax legislation to offset the VAT, which resulted in yet more EU complaints and another WTO case. The WTO decided in favor of the EU, leading to a ruling in 2002 allowing the EU to impose retaliatory tariffs of $4 billion each year on U.S. imports. By this time 25 European nations enacted the VAT to usurp America’s ability to trade.

In 2004 Pres. Bush created new legislation again to offset the VAT. This again led to complaints from the EU – again filing a case with the WTO – arguing export subsidies were provided by the new legislation. In 2006 President Bush and Congress stopped enacting the tax provisions to U.S. exporters, demonstrating how the EU and WTO had successfully usurped the U.S. of its power to promote fair and free trade.

During the battle between the WTO and the U.S., all nations were provided full VAT privileges, usurping the U.S. of fair trade. The WTO and EU do not serve in the best interest of the U.S. They are acting to support and promote continuance of this debilitating tax.

The only way the WTO will allow us to offset the VAT is to have one of our own. We could feasibly do this if we were to lower our income tax. Until we do get a VAT of our own, our companies and our nation will continue to suffer against this unfair disadvantage.

While the US is straitjacketed by partisan bickering and paralyzed by insane trade policies, Germany and other countries are surging ahead with enlightened, rational thinking which gets translated into effective policies that keep the German government in a position of solvency and keep German factories humming. Meanwhile, the US engages in a race to the bottom encouraging the export not of products but of jobs and defunding the government by giving tax breaks to corporations and the rich. Another informative article is the following:

In a June 28, 2010, economist Ian Fletcher said “Germany, like the U.S., is nominally a free-trading country. The difference is that, while the U. S. genuinely believes in free trade, Germany quietly follows a contrary tradition that goes back to the 19th-century German economist Friedrich List … So despite Germany’s nominal policy of free trade, in reality a huge key to its trading success is a vast and half-hidden thicket of de facto non-tariff trade barriers.”

Fletcher quoted from a report by the Heritage Foundation: “Non-tariff barriers reflected in EU and German policy include agricultural and manufacturing subsidies, quotas, import restrictions and bans for some good and services, market access restrictions in some services sectors, non-transparent and restrictive regulations and standards, and inconsistent regulatory and customs administration among EU members.”

Another opinion of Germany’s export success as reported in The New York Times, is “the roots of Germany’s export-driven success reach back to the painful restructuring under the previous government of Chancellor Gerhard Schröder. By paring unemployment benefits, easing rules for hiring and firing, and management and labor’s working together to keep a lid on wages, ensured that it could again export its way to growth with competitive, nimble companies producing the cars and machine tools the world’s economies – emerging and developed alike – demanded.”

The same article reported that Germany’s Chancellor Angela Merkel resisted the use of government stimulus spending that the United States and some European partners used to handle the recession. Instead of extending unemployment benefits like the United States has done several times since the recession began, Germany “extended the “Kurzarbeit” or “short work” program to encourage companies to furlough workers or give them fewer hours instead of firing them, making up lost wages out of a fund filled in good times through payroll deductions and company contributions. At its peak in May 2009, roughly 1.5 million workers were enrolled in the program,” and the Organization for Economic Cooperation and Development estimated that “more than 200,000 jobs may have been saved as a result.”

As a result, Germany’s unemployment rate at the height of the global recession was 9.0 percent in contrast to the 10.2 percent of the United States. The German jobless rate in October 2010 was down to 7.0 percent in contrast to the 9.6 percent of the United States. Germany is one of the few economies experiencing a solid recovery and one of the even fewer economies without a substantial deficit crisis on its hands. Germany’s exports surged month by month in 2010, but year-end data hasn’t been released yet.

The US model of free trade has largely worked to create a trade deficit in the US, encourage a consumer based economy based on cheap imported products and undermine American workers. While the US encourages the offshoring of US corporations and unlimited imports into the US economy, it gives no incentives for corporations based in the US to export to other countries. As a result it is at a competitive disadvantage, and is losing out in the struggle to supply its government with cash and its workers with jobs. But instead of a rational assessment of this situation and a resolve to do something about it, the US argues about the President's birth certificate and engages in pointless, meaningless culture wars tantamount to arguing about how many angels can dance on the head of a pin.

December 27, 2010

As an American expat living in the European Union, I’ve started to see America from a different perspective.

The European Union has a larger economy and more people than America does. Though it spends less -- right around 9 percent of GNP on medical, whereas we in the U.S. spend close to between 15 to 16 percent of GNP on medical -- the EU pretty much insures 100 percent of its population.

The U.S. has 59 million people medically uninsured; 132 million without dental insurance; 60 million without paid sick leave; 40 million on food stamps. Everybody in the European Union has cradle-to-grave access to universal medical and a dental plan by law. The law also requires paid sick leave; paid annual leave; paid maternity leave. When you realize all of that, it becomes easy to understand why many Europeans think America has gone insane.

Der Spiegel has run an interesting feature called "A Superpower in Decline," which attempts to explain to a German audience such odd phenomena as the rise of the Tea Party, without the hedging or attempts at "balance" found in mainstream U.S. media. On the Tea Parties:

Full of Hatred: "The Tea Party, that group of white, older voters who claim that they want their country back, is angry. Fox News host Glenn Beck, a recovering alcoholic who likens Obama to Adolf Hitler, is angry. Beck doesn't quite know what he wants to be -- maybe a politician, maybe president, maybe a preacher -- and he doesn't know what he wants to do, either, or least he hasn't come up with any specific ideas or plans. But he is full of hatred."

The piece continues with the sobering assessment that America’s actual unemployment rate isn’t really 10 percent, but close to 20 percent when we factor in the number of people who have stopped looking for work.

Some social scientists think that making sure large-scale crime or fascism never takes root in Europe again requires a taxpayer investment in a strong social safety net. Can we learn from Europe? Isn't it better to invest in a social safety net than in a large criminal justice system? (In America over 2 million people are incarcerated.)

Jobless Benefits That Never Run Out

Unlike here, in Germany jobless benefits never run out. Not only that -- as part of their social safety net, all job seekers continue to be medically insured, as are their families.

In the German jobless benefit system, when "jobless benefit 1" runs out, "jobless benefit 2," also known as HartzIV, kicks in. That one never gets cut off. The jobless also have contributions made for their pensions. They receive other types of insurance coverage from the state. As you can imagine, the estimated 2 million unemployed Americans who almost had no benefits this Christmas seems a particular horror show to Europeans, made worse by the fact that the U.S. government does not provide any medical insurance to American unemployment recipients. Europeans routinely recoil at that in disbelief and disgust.

In another piece the Spiegel magazine steps away from statistics and tells the story of Pam Brown, who personifies what is coming to be known as the Nouveau American poor. Pam Brown was a former executive assistant on Wall Street, and her shocking decline has become part of the American story:

American society is breaking apart. Millions of people have lost their jobs and fallen into poverty. Among them, for the first time, are many middle-class families. Meet Pam Brown from New York, whose life changed overnight. The crisis caught her unprepared. "It was horrible," Pam Brown remembers. "Overnight I found myself on the wrong side of the fence. It never occurred to me that something like this could happen to me. I got very depressed." Brown sits in a cheap diner on West 14th Street in Manhattan, stirring her $1.35 coffee. That's all she orders -- it's too late for breakfast and too early for lunch. She also needs to save money. Until early 2009, Brown worked as an executive assistant on Wall Street, earning more than $80,000 a year, living in a six-bedroom house with her three sons. Today, she's long-term unemployed and has to make do with a tiny one-bedroom in the Bronx.

It's important to note that no country in the European Union uses food stamps in order to humiliate its disadvantaged citizens in the grocery checkout line. Even worse is the fact that even the humbling food stamp allotment may not provide enough food for America’s jobless families. So it is on a reoccurring basis that some of these families report eating out of garbage cans to the European media.

For Pam Brown, last winter was the worst. One day she ran out of food completely and had to go through trash cans. She fell into a deep depression ... For many, like Brown, the downfall is a Kafkaesque odyssey, a humiliation hard to comprehend. Help is not in sight: their government and their society have abandoned them.

Pam Brown and her children were disturbingly, indeed incomprehensibly, allowed to fall straight to the bottom. The richest country in the world becomes morally bankrupt when someone like Pam Brown and her children have to pick through trash to eat, abandoned with a callous disregard by the American government. People like Brown have found themselves dispossessed due to the robber baron actions of the Wall Street elite.

Hunger in the Land of the Big Mac

A shocking headline from a Swiss newspaper reads (Berner Zeitung) “Hunger in the Land of the Big Mac.” Though the article is in German, the pictures are worth 1,000 words and need no translation. Given the fact that the Swiss virtually eliminated hunger, how do we as Americans think they will view these pictures, to which the American population has apparently been desensitized.

Perhaps the only way for us to remember what we really look like in America is to see ourselves through the eyes of others. While it is true that we can all be proud Americans, surely we don't have to be proud of the broken American social safety net. Surely we can do better than that. Can a European-style social safety net rescue the American working and middle classes from GOP and Tea Party warfare?

December 20, 2010

The recent bill that passed Congress that extended the Bush tax cuts for two years, funded unemployment insurance and did a few other things will undoubtedly create more "economic activity." But will it create jobs? That's the 64 trillion dollar question. Economic activity is not synonymous with job creation although that's the theory Obama is gambling his Presidency on. Economic activity is synonymous with positive GDP growth, but GDP growth has been positive since the third quarter of 2009. GDP growth has been positive for 5 straight quarters and hence by definition the US is officially not in a recession and hasn't been for the entire year of 2010. However, there is still an official unemployment rate of about 10% and an unofficial unemployment rate of 17%. At the same time job growth has been anemic. About a million jobs have been created in 2010 which is more jobs than were created during the entire Bush Presidency, but that isn't even enough to cover new entrants into the work force. About 100,000 new jobs per month are required just to stay even. That's 1.2 million jobs a year. Therefore, taking new entrants into the job force into consideration, there has actually been net negative job growth for the last 10 years including Obama's Presidency!

Something like 8 million jobs were lost during the Great Recession. Currently, there are over 400,000 initial claims for unemployment insurance every week. The statistics are ominous but, what is worse, government officials don't seem to have a clue as to why this is happening. There is no explanatory narrative, and their only theory is that increased economic activity will lead to job creation. Not necessarily so. What is certain is that the Obama tax cut plan will drill another trillion dollar hole in the national debt. And it will likely create jobs not in the US but in China and other Asian countries where labor is much cheaper than in the US. It's called labor arbitrage. When barriers to trade fall as they have with the current free trade penchant, businesses will move jobs to whatever country has the cheapest labor force and in today's world that means China. One is hard put to purchase a product not made in China. Consequently, increased economic activity will mean that GDP will increase as consumers buy more products MADE IN CHINA. That translates into few, if any, jobs created in the US.

The Obama administration is also trying to increase exports to serve the growing consumer markets in the developing countries of the world. That would arguably create jobs in the US. Only problem is that the transnational corporations, which are eager to serve those markets, prefer to locate their production plants not in the US but in those countries next to the emerging consumer markets. That way they get the best of both worlds. They get cheap labor AND they are close to the markets they want to serve. This leaves the US at a huge disadvantage. Corporations are eager to serve the US consumer market which is 70% of US GDP, but they don't want to locate production plants in the US because the cost of labor is too high.

So where does this leave the Obama administration. In a hole, likely, having added greatly to the national debt without having created many jobs, certainly not even enough to accommodate new workers entering the labor force. The Fed's attempts to get people to borrow and spend by lowering interest rates and by quantitative easing have been an abysmal failure when it comes to job creation. The money has been borrowed and invested primarily in emerging markets where profits are greater - not in the US. Government officials and the punditry seem to think that, if only they could get Americans to consume more, all would be well, but all would not be well as consumption is not correlated with job creation as long as everything Americans consume is produced elsewhere.

Automation, computerization and robotization have also decreased the need for much skilled labor. As a result the only jobs left are for those with a minimum of skills and those workers can be acquired cheaply in other countries. Professional jobs are also being outsourced to India and elsewhere as cheap internet connections make it profitable to outsource any jobs whose output is primarily paper which can be transmitted electronically to its final destination. Legal and engineering jobs, therefore, have been essentially outsourced to countries with college educated work forces which can handle professional job tasks. This makes it highly unlikely that the US can educate its way out of this dilemma. There has been much handwringing over the pitiful state of the US educational system which is inferior to those of many other countries of the world. But even improvements in education will not fix the problem that results from the fact that educated professionals in other countries will work for one tenth of the expected salaries in the US.

So what can be done about American jobs? What have other countries done? Germany, for example, has a healthy economy based largely on exports and also on the fact that German consumers buy products mainly produced in Germany. For all intents and purposes Germany has healthy tariffs although they don't call them that. Germany has a VAT tax which must be paid not only by companies producing products in Germany, but also, to be fair, by products entering the country as imports. The imports must pay the entire VAT tax in one fell swoop whereas German producers merely pay at each stage of production which spreads the tax over several companies. So imports are discouraged and German producers are encouraged. Other successful countries have in one way or another encouraged domestic producers. Government subsidies have given certain industries an edge, and, consequently, have sustained jobs in country. The US should learn from the example of other countries.

Obama and others hope that jobs will be created indirectly as a result of tax breaks. But this policy has historically proven to be a failure. It's a continuation of Reaganomics and supply side economics which was practiced by the Bush administration with the result that no net jobs were created in the entire Bush Presidency. The only jobs created by Bush were in the military and with private defense contractors. So Obama is gambling his Presidency on a failed Bush policy. One doesn't need a crystal ball to predict what the outcome will be: anemic job creation and a one term Presidency for Obama.

Other countries have industrial policies in which government works with industry in such a way as to create products both for internal consumption and for a successful export economy. This may involve intelligent subsidies instead of the lobbyist sustained subsidies in the US for malignant industries like oil and agricultural products. Other countries manage to place tariffs on imported products which compete with industries which they are trying to promote. The US penchant for free trade is only shooting itself in the foot. The US government funded itself entirely by by means of tarrifs from its founding up until the First World War - over 100 years. In short, US supply side economic and free trade policies are working to its disadvantage and to the advantage of its competitors. Meanwhile, US workers are being left out in the cold. They are being hung out to dry.

Finally, the one thing that is anathema to Republicans and Tea Partiers is direct job creation by the US government, but that may ultimately be the only alternative left to it after all the monetary and supply side economic policies have been exhausted. Franklin Roosevelt created the Civilian Conservation Corps and the Works Progress Administration which put millions of Americans to work during the 1930s. The US Congress became the country's largest employer. Much needed repairs to infrastructure were carried out as well as other beneficial projects. Today infrastructure is badly in need of repair and there are many useful potential jobs which private enterprise is loathe to undertake because they are not deemed to be profitable. Instead of just giving money to long term unemployed, they could be put to work in ways which would not only benefit the economy but would provide a source of labor for infrastructure improvement and beautification.

November 15, 2010

President Obama's trip to Asia was billed as one to increase American exports. But American multinational corporations aren't interested in increasing exports because they have built manufacturing facilities in China, South Korea, Thailand and other places where labor is cheaper than American labor. Their preferred modus operandi is to export to the American market and sell directly to the local market abroad, hence, exports from the US are a non-starter. For consumers in foreign countries who want an American product, there is no need to import it from the US. They can buy it from a US corporate manufacturing facility located in their own country. That's why President Obama is barking up the wrong tree. He should be more interested in getting multinational corporations, American and otherwise, to locate manufacturing facilities in the US in order to create American jobs even if their only goal is to sell to the American market and not to export. The only way to do this is to change the import tax laws to encourage companies to locate production facilities here. President Clinton threatened a 100% import tax on luxury vehicles and Toyota promptly started locating manufacturing facilities in the US to protect the market for their Lexus.

It doesn't really matter whether foreign multinationals or American corporations build manufacturing facilities in the US. It's all about providing jobs. With current policies successful start-up companies will provide American jobs temporarily until they grow to a certain size, and then they will offshore those jobs in order to increase profits. So small business start-ups will not be the salvation for American job-seekers except in the very short run. Some worry that profits from Toyota's US manufacturing operations, for example, are repatriated to Japan. But so what? Profits from American corporations operating abroad are held offshore where they aren't taxed. So for all intents and purposes they are not repatriated to the US and, even if they were, they would only end up in rich investors' pockets. By encouraging foreign corporations to locate here, they can at least be taxed before their profits are repatriated. That makes them more desirable than American multinationals who neither provide jobs in the US nor pay taxes in the US. Their sole relation to the US is the fact that they originated here and are registered here, but that can be quickly changed as we saw with Halliburton which moved its registration to Dubai. And even "American" companies have subsidiaries in places like the Cayman Islands, the better to take advantage of lax tax laws. From the average middle class American's point of view, if a corporation doesn't provide American jobs or pay American taxes, what good is it? And if a foreign multinational corporation does provide American jobs and pays American taxes, it is preferable to an American multinational.

The only way to get muiltinational corporations to build production facilities in the US is to make it relatively unprofitable for them to import into the US market. This can only be done by an import tax or tariff of some sort. I'm sure there are sophisticated ways to accomplish the same thing without mentionaing the dreaded word "tariff." Tariffs, by the way, were the largest source of federal revenue from the 1790s to the eve of World War I, a period of some 124 years or more than half the country's history. Ideologically at the present time, tariffs are anathema to the US because of its rhetoric and espousal of free trade. But the US is being played by other countries who effectively take advantage of American open markets while effectively closing their own markets. South Korea is a good example. It exports its cars here while closing its markets to cars from the US. However, it is open to the idea of American car corporations building production facilities in their country. Why? Because that provides jobs for their own citizens and local taxes. Thus there is no need to import those cars and other products from the US.

Globalization is not going away. Each country needs to respond to it in such a way as to protect its own interests. So far the US has failed to do so. President Obama's attempts to invoke rules to even out the trade imbalances so far have gotten him nowhere. Trying to jawbone China to revalue its currency is an excercise falling on deaf ears. Even quantitative easing, the Fed's latest attempt to make American exports more competitive only breeds resentment among our foreign competitors and represents taking a club to kill a gnat. The only effective response is one which unilaterally changes American laws and policies to create a benefical trade policy, not going around trying to get a bunch of other nations to cooperate in doing something beneficial to American interests. The only solution is to take a page out of the other countries' books. It's not exports that matter. It's the location of production facilities in the US that matters. That's what will provide jobs and increase tax revenues. So importing into the US market from abroad has to be made more onerous for the importers. Only then will they decide that locating production facilities and hence providing American jobs within the US is the way to go. Over half the imports into the American market are from American corporations which have located production facilities abroad in order to take advantage of cheap foreign labor.

The US taxpayers bailed out General Motors. We actually own a good percentage of GM, but what is GM doing? It's building production facilities abroad. It is not providing American jobs in gratitude for being bailed out. This is from the Detroit News:

Washington -- General Motors Corp. will shift more production of vehicles bound for the U.S. market to China, Mexico, South Korea and Japan, but will keep total imports at roughly one-third of all sales here.

In a confidential 12-page presentation to members of Congress, obtained by The Detroit News on Friday, GM said it will boost U.S. sales of vehicles built in those four countries by 98 percent -- or about 365,000 vehicles -- while shrinking production in Canada, Australia and European countries by about 130,000 vehicles.

GM also disclosed it will start importing vehicles made in China in 2011, reaching 51,546 vehicles in 2014. Imports from South Korea to the United States will jump from 36,967 vehicles in 2010 to 157,126 in 2014.

The automaker said it is canceling expansion projects in Russia, India and Mexico.

GM's plan to import more vehicles from low-wage countries raises questions about whether it should beef up its foreign operations as it is relying on federal money to stay afloat. It also puts the automaker at odds with the United Auto Workers, which is trying to protect U.S. jobs amid a dramatic restructuring of the domestic auto industry.

So GM has no effective allegiance to the US despite being bailed out with taxpayer money. The same goes for Ford. Ford is planning to build a $450 million car plant in Thailand.

Ford Motor Co. is investing $450 million in a new passenger car plant in Thailand, cementing the country's status as an Asian manufacturing base for the automaker despite prolonged political unrest.

The plant with an annual production capacity of 150,000 vehicles will begin assembling the next-generation Ford Focus from 2012, the company said Thursday. Some 85 percent of cars produced at the facility will be sold overseas and the rest in Thailand.

Ford said up to 2,200 people will be employed at the factory slated for construction in the eastern seaboard province of Rayong that serves as a base for automakers and other industries.

It's all about the jobs. How does Germany, a high exporting nation, manage to keep high paying jobs in its own country? That's maybe something Obama and the Democrats should study and try to emulate. One way they do it is that most German companies build their products in Germany and then export them while US corporations build plants near their markets and produce for the local foreign market so their sales do not count as exports. Coca Cola has production and marketing facilities in over 200 countries. Germany has powerful trade unions and an extensive vocational education program. Every manufacturing facility is unionized unlike in the US where unions have a vastly smaller role than they did just 30 years ago. Work councils in Germany put workers and management together in a decision making capacity. All industrial imports into Germany are subject to an "Import Turnover Tax" of 19%, which is charged on the duty-paid value of the import article plus the customs duty, which varies by item. The Import Turnover Tax is designed to place the same tax burden on imported goods as goods produced domestically, on which is levied a 19% "Value-added Tax" (VAT). The German customs authorities collect both customs duty and Import Turnover Tax. Germany's regulations and bureaucratic procedures can be a difficult hurdle for companies wishing to enter the market and require close attention by U.S. exporters. Complex safety standards, not normally discriminatory but sometimes zealously applied, complicate access to the market for many U.S. products. U.S. suppliers are well advised to do their homework thoroughly and make sure they know precisely which standards apply to their product and that they obtain timely testing and certification. Selling into the American market should be considered a valuable privilege. Therefore, according to free market principles, it shouldn't be given away for free. The US government needs revenue. A VAT tax and a corresponding import turnover tax would not only replenish US government coffers but would tend to equalize the profitability of companies manufacturing abroad and those manufacturing in the US. Reunionization of US workers would also contribute a voice in favor of keeping production and, therefore, jobs local and in country.

It's true that Honda and Toyota only located plants in the US because they were worried about import duties that might come into being. But their US plants were just used for assembly operations. They still imported most of the parts from foreign cheap labor countries. What the US needs is an industrial policy that is concerned with providing jobs for American citizens. This means that the US has to be seen as an attractive place for multinational corporations to locate or it has to be seen as an unattractive place to import into a desirable consumer market. In the past tax breaks and other perks have been given to auto companies by states in competition among themselves to get plants located in their state. A national industrial policy needs to be put in place that would prevent the states from competing against each other in order to get plants located within their state. That way the states can't be played off against each other by foreign or domestic corporations.

The US will not be successful in cajoling its trading partners to "equalize" trade balances or to revalue their currencies. Only unilateral policies that seek to get multinational corporations to locate production plants inside the US can hope to change the status quo. Trade policy and industrial policy can effectively provide incentives to create jobs here and to discourage imports. The US needs to renounce its policy of free trade in favor of fair trade, and fair trade can only be established if the US changes its policies from within.

(Reuters) - China rebuffed on Friday a U.S. plan to set target limits for trade imbalances and Germany dubbed the Fed's money-printing policy "clueless," setting the stage for what could be a fractious G20 summit next week.

Washington believes an undervalued yuan is a major cause of economic imbalances and has pressed Beijing, largely in vain, to let the currency rise more swiftly to reflect the strength of what is now the world's second-largest economy.

The waters of the debate have been muddied by the Federal Reserve's decision to buy $600 billion in long-term bonds with new money in an effort to revive the flagging U.S. economy.

Resentment is rumbling worldwide that the initiative will generate even more instability by ramping up currencies against the dollar, inflating asset bubbles and increasing inflation.

"With all due respect, U.S. policy is clueless," German Finance Minister Wolfgang Schaeuble told a conference.

"(The problem) is not a shortage of liquidity. It's not that the Americans haven't pumped enough liquidity into the market and now to say let's pump more into the market is not going to solve their problems."

Policymakers from the world's new economic powerhouses in Latin America and Asia have said they would consider fresh steps to curb capital inflows after the Fed's move.

Zhou Xiaochuan, China's central bank governor, said while Beijing could understand that the Fed was implementing more monetary easing in order to stimulate the U.S. recovery, it may not be a good policy for the global economy.

NO BALANCE

Efforts to reduce imbalances that are destabilizing the global economy will top the agenda of the November 11-12 summit of the Group of 20 forum of leading economies in Seoul.

But China and Germany have now both opposed a plan floated by U.S. Treasury Secretary Timothy Geithner last month to cap current account surpluses and deficits at 4 percent of gross domestic product.

"Of course, we hope to see more balanced current accounts," Chinese Vice-Foreign Minister Cui Tiankai told a news briefing. "But we believe it would not be a good approach to single out this issue and focus all attention on it. The artificial setting of a numerical target cannot but remind us of the days of planned economies." (Ed. Note: What a twist - China accuses US of doing something reminiscent of the bad old days of communism!)

German Economics Minister Rainer Bruederle dismissed the proposal at the time as smacking of old-style central planning.

Cui, China's chief G20 negotiator, also rejected any attempt to set target ranges for the yuan to appreciate.

"That would indeed be asking us to manipulate the ... exchange rate, and it is something that we will of course not do," Cui said.

ASEAN, the 10-nation group of southeast Asian countries, will also raise concerns at the G20 over the U.S. proposals.

"We would like to work with G20 to correct imbalances," Thai Finance Minister Korn Chatikavanij said in the Japanese city of Kyoto where Asia-Pacific finance ministers are meeting.

"But we are concerned that the U.S. plan about current account balances might lead to trade protectionism."

The Asia-Pacific Economic Cooperation (APEC) forum in Kyoto, which Geithner will attend, will also provide an opportunity for emerging economies to voice their views of the Fed's action.

INTEREST RATES

Japan's central bank on Friday gave details of its own asset-purchase programme, announced last month. Worth 5 trillion yen ($62 billion), it is just a tenth the size of the Fed's scheme.

By pointing out the difference in scale, Economics Minister Banri Kaieda suggested that the Bank of Japan might face calls in the future for an expanded scheme.

Cui said he was worried at the prospect of a flood of money pouring into global markets in search of higher yields. As the issuer of the world's main reserve currency, the United States needed to adopt a responsible position.

"They owe us some explanation," he said. "I've seen much concern about the impact of this policy on financial stability in other countries."

An official newspaper said China needed to respond by raising interest rates again following a surprise increase on October 19.

Inflationary pressures prompted both India and Australia to raise interest rates this week.

Thailand's Korn said he accepted that the country's currency, the baht, would appreciate due to strong economic fundamentals, but he wanted to avoid damage from a sudden reversal in speculative money.

"We are willing to take whatever measures when necessary," he told Reuters before the start of a meeting of the APEC finance ministers.

Thailand has imposed a 15 percent withholding tax on interest and capital gains earned by foreign investors on Thai government bonds. Brazil has also taxed foreign buyers of its bonds.